In the complex world of home financing, a common concern among our clients involves the impact of credit inquiries on their credit scores. Often, the thought of a mortgage credit check can make potential borrowers hesitant and fear it might lower their overall credit scores.
We’ve all heard it before…
“Can’t you just use my free Borrowell report?”
“I don’t want anyone to pull my credit, it will hurt my score!”
Oh sure, sometimes our prospective clients just want a judgment call on their borrowing power and in most cases, I am comfortable assessing files without having to pull their official credit history. I’ve taken several client files pretty far without going through a hard inquiry.
However, without a complete history and proper credit report, my advice and opinions on their borrowing power will be filled with disclaimers, just in case there are any outstanding balances, loans, or late payments my client has either forgotten or has not yet disclosed to me. And, of course, sometimes there are outright errors in the credit report.
Understanding credit inquiries in mortgage applications
As mortgage professionals, it’s our duty to clarify and reassure clients about the realities of credit inquiries and the minimal impact they typically have.
Let’s dive into why borrowers shouldn’t worry excessively about their mortgage credit inquiry. To be clear, if someone wants a formal mortgage pre-approval or even a rate hold, then yes, absolutely, we have to pull a credit report.
Here’s the reality:
- Minimal impact: A single credit inquiry usually has a very small effect on your credit score, potentially lowering it by just 5 to 8 points.
- Credit score buffer: Most diligent credit users have a score buffer that more than compensates for the minor deductions caused by inquiries.
- Purpose of building credit: Remember, a big reason for maintaining a good credit history is to utilize it when making significant decisions like buying or refinancing a home.
In essence, avoiding a credit check could hinder your ability to get pre-approved for a mortgage. It’s crucial to let your mortgage professional proceed with the necessary checks to ensure you’re on the right track to securing your home loan.
Real-world insights into credit inquiries
Note to our readers: For client privacy, the names of the subjects in this story have been changed. The values mentioned in this story are accurate and true. These case studies are presented to educate Canadians in a couple of different home purchase situations. One is for move-up buyers, and the other is about first-time homebuyers.
Case Study 1: The high achievers with credit concerns
- Client Story: Tiana & Leo
- Combined household income: $181,600
- Current home value: $695,000
- New home value: $910,000
- Client goal: Selling their townhome to purchase their forever home
Tiana and Leo live in a townhome in Kitchener and recently they came to us wanting to be pre-qualified for a mortgage. They and their two kids are excited about moving up to their forever home. But there was a snag—Tiana was very hesitant about us pulling her credit report. She feared it might negatively impact her credit score.
Their outcome: Why it pays to check even if you’re scared!
With a bit of guidance and reassurance about the process, Tiana and Leo agreed to let us proceed with the credit inquiry, which of course is a standard step in the mortgage pre-approval process.
Drum roll please…
When we checked her credit, Tiana had a pristine score of 900! The absolute pinnacle, something we only see once in a blue moon! Clearly, she had nothing to worry about. It doesn’t get any better than 900!
Naturally with that credit score (Leo’s score was also very high), securing the pre-approval they wanted became a piece of cake!
Case Study 2: Multiple inquiries, minimal impact
- Client story: Fiona & Bart
- Combined household income: $251,700
- Current home value: N/A – they are first-time buyers
- New home value: $1,600,000
- Client goal: They Are Ready To Purchase Their First Home
Fiona and Bart, a forward-thinking couple in their early thirties, approached us with a clear goal: they were ready to purchase their first home. Unlike many first-time buyers, they were quite relaxed about the entire credit scoring process, understanding its necessity in the home-buying journey.
Their outcome: Stable scores through multiple inquiries
Given that a credit report’s validity lasts only 30 days, we found ourselves needing to pull their reports multiple times as we journeyed from pre-approval to final approval, while at the same time negotiating with two different lenders over a few months.
Additionally, each bank required their own credit pull. Despite the frequency of all these inquiries, the impact on their credit scores was really minimal.
Here’s how it played out:
- Initial score: Fiona started with 823, and Bart with 834.
- During the process: Fiona’s score fluctuated slightly, dropping to 817 before returning to 823, showing her credit score’s resilience. Bart’s score dipped modestly to 822.
- Final score: By the end of the process, both scores remained strong and high, demonstrating that multiple inquiries (in this case, five consecutive inquiries in the span of three months), when done within a proper context, do not have a significant detrimental effect.
Credit score comparison
This is a comparison chart for all the dates and inquiries we made for Fiona and Bart. You can clearly see that even with five credit inquiries, there were minimal changes to both of their scores.
This experience underscores the importance of not sweating the small stuff. Multiple inquiries might sound daunting, but in the structured environment of mortgage applications, they are just part of the process and are less impactful than often feared.
Why mortgage credit inquiries should not deter you
Understanding the nuances of credit inquiries can significantly ease the concerns of both mortgage professionals and their clients. Personal credit expert Richard Moxley notes that multiple mortgage-related inquiries over 45 days only impact your Equifax Canada score as a single inquiry, and with TransUnion Canada, the same is true over a 15-day period.
This minimizes the impact on your credit score and highlights the importance of proceeding with necessary credit checks during the mortgage application process.
Key takeaways:
- Educate clients: As mortgage professionals, it is our responsibility to educate clients about the true impact of credit inquiries.
- Reassure borrowers: Reassure your clients that a high credit score is built to withstand such inquiries, particularly when they are crucial for securing a mortgage.
- Encourage transparency: Encourage clients to consent to credit pulls to facilitate a smoother pre-approval process.
By demystifying the impact of mortgage credit inquiries, we can help clients move forward with confidence, knowing their credit health is secure and their home financing is on track.
